50 Disruptive Companies 2013

In 2007, Tony Fadell believed he could see the future. He was an Apple executive who had created the iPod and was a leading figure on the team that had worked on the iPhone, which the company was about to launch. He knew people would soon form attachments to the Internet-connected computers they carried in their pockets, and he kept thinking about that as he started another major project: building an energy-efficient dream home near Lake Tahoe.

“I said, ‘How do I design this home when the primary interface to my world is the thing in my pocket?’ ” says Fadell. He baffled architects with demands that the home’s every feature, from the TV to the electricity supply, be ready for a world in which the Internet and mobile apps made many services more responsive. When it came to choosing a programmable thermostat for his expensive eco-friendly heating, ventilation, and air conditioning (HVAC) system, Fadell blew a gasket: “They were 500 bucks a pop, and they were horrible and doing nothing and brain-dead. And I was like, ‘Wait a second, I’ll design my own.’ ”

Fadell, who soon left Apple at the age of 40, became convinced that his thermostat needed to be built like a smartphone and controlled from one. He wanted it to be smart enough to learn his routine and to program its own schedule accordingly, or to switch off automatically if he went out. A thermostat, he thought, could do that if it was really a small computer connected to the Internet. As he planned the features and design in his head, Fadell began to believe that his vision would appeal to other people too, even if their homes were more ordinary. With about 10 million thermostats sold in the United States every year, it could be a lucrative business. And because thermostats typically control half the energy used in U.S. homes, a better-designed one could significantly reduce power consumption. He sought out Matt Rogers, a precocious 27-year-old who at the time led iPhone software development, and got him to leave Apple to cofound Nest.

Fadell’s instincts turned out to be correct. Nest’s first model, a striking stainless-steel-ringed disc with a circular display, went on sale in October 2011 to widespread acclaim. The HVAC industry, a sector as unexciting as the thermostats it sold, was astonished by the fresh ideas behind the device, which learned from its owners’ behavior and could be controlled with a polished mobile app. The company released a second, more advanced thermostat in October 2012, and says sales of the two models have been brisk. The $250 product has kept owners from using 225 million kilowatt-hours of energy, the company estimates—saving around $29 million at average U.S. prices. This suggests that merely with elegant design and computing savvy, Nest might be having more impact than other Silicon Valley ventures trying to deliver on the promise of “clean tech.” Now the company is preparing to release another product. Details are scarce, but it seems that Fadell’s thermostat epiphany has launched a technological campaign that will make every part of your home more intelligent.

Reprogramming

Fadell has the energy and ready smile of a late-night talk show host, and a voice that is permanently loud. Rogers is quieter and more technically focused. The pair appear to be having enormous fun sweating the details of what is, at its core, just an on-off switch. They burst into a meeting room at Nest’s unremarkable offices in Palo Alto like two boys coming in from playing in the yard, breathless, in high spirits, and completing one another’s sentences. Between them, they have had significant roles in creating two of the most iconic technology products of recent history, the iPod and iPhone—devices notable not only because they are useful and fashionable, but because they introduced genuinely new technological ideas. ­Rogers and Fadell have done the same at Nest, delivering a product that is both easier to use and more powerful than those that came before. That approach has helped them make the thermostat, historically a product bought and installed by contractors, into something people buy for themselves in the same stores where they get gadgets like phones and tablets.

For half a century, the state of the art in home energy controls has been the programmable thermostat. The theory is that if people can schedule when their heating and cooling systems will kick in, they don’t have to waste energy by running the system at all times to be assured of comfortable temperatures when they wake up or return from work. But the HVAC industry has made programmable thermostats difficult to use, with unintuitive dials and sliders and cramped displays. Citing such “user interface issues,” the Environmental Protection Agency removed programmable thermostats from its Energy Star certification program in 2009. Studies showed that they didn’t reliably save energy; in fact, because many people end up switching their system on and off manually, programmable thermostats might cause most people to use more energy, says Kamin Whitehouse, a computer science professor at the University of Virginia. “People have a really hard time setting accurate schedules for their lives,” he says.

When faced with a problem like this, many technologists would seek technical solutions. Fadell and Rogers thought instead about simplifying the device. “We started with the basic principle that 99.9 percent of the time, the only thing that you do is turn it up or down,” Fadell says. “So what’s the simplest form? A knob or a dial.” More complex functions, such as setting a schedule, could be executed more easily through a mobile app. That freed his designers from having to accommodate the many buttons that appear on other programmable thermostats. The Nest became nothing more than a compact stainless-­steel cylinder that you can turn once it’s fixed to the wall.

Fadell and Rogers have made sure that at every stage of installing and operating a Nest thermostat, you discover that potential problems have been solved for you. When you attach the device to a wall, there’s no need to drill holes or use plastic anchors to hold any screws. Nest’s engineers reviewed every screw on the market and then invented their own, with wide-spaced threads that can bite wood or powdery drywall without making it crumble. The device powers itself by leeching electricity from the control wires that connect it to your HVAC system, a feat that makes Rogers chuckle at his engineers’ audacity. Short- and long-range infrared sensors allow the device to light up when you approach and dim when you walk away—and to figure out that it was you, not the cat, who just went out, meaning it’s time to turn down the heat. Perhaps the biggest reminder of the thermostat’s intelligence comes a few days after installation, when you reach out to adjust the temperature and find that it has preëmpted you by learning from your earlier changes. “Think of a normal thermostat. Everyone turns it up, turns it down, a couple of times a day—that’s a pattern we can infer from,” says Fadell. “Instead of changing it fifteen hundred times a year, do it 10 or 20 times and the Nest thermostat can learn from that.”

Fadell can deliver animated monologues about products that don’t meet his ideals, an aspect of his personality that was probably strengthened by years of working closely with Steve Jobs. But he also remains open to taking instruction from hard data, drawing on evidence collected from Nest thermostats, customer surveys, and a group of around 1,000 customers whose thermostats are used to test new features. For example, Nest thermostats originally adjusted themselves to an energy-conserving setting in the morning two hours after detecting that human activity in a home had stopped. They waited that long in case the owner soon returned home. But anonymous data from Nest thermostats revealed that people reliably stayed out for quite a while when they left in the morning. So the company sent a software update to all the thermostats to take that into account. Now the devices turn themselves down after just 30 minutes.

Such responsiveness to data from users isn’t a quality typically found in the HVAC industry, which is dominated by a few large companies, such as Honeywell and Venstar, that sell to distributors and dealers, not consumers. It’s an approach more commonly found in Silicon Valley companies, reflecting the fact that Nest is staffed with dozens of engineers who helped Apple build the iPod and iPhone. Rogers’s former computer science professor Yoky Matsuoka, a winner of a MacArthur genius award, leads Nest’s algorithms group. As a result, if you were drawing the Nest thermostat on a technological evolutionary tree, it would be an offshoot of the smartphone line. Rogers says, “Tear apart a Samsung smartphone—it’s going to have a lot of the same components.” In another echo of the mobile computing business, where the biggest players are locked in court battles over patents, Honeywell sued Nest for patent infringement a year ago. “They’re one of the biggest companies in the world, and they feel threatened by a 150-person startup,” says Rogers. “That’s amazing.”

Soft Power

Nest is being watched by green-tech researchers and investors who believe it may lead a new wave of technologies that can significantly reduce power use in homes, which account for about 10 percent of U.S. energy consumption. The government allocates tens of millions of dollars per year for programs that reduce energy use in residential buildings. But many home improvements, such as insulation and storm windows, cost thousands of dollars per house and deliver energy savings comparable to what a better thermostat can generate for far less money, Whitehouse says.

Nest says that a home with its product will save $173 per year in electricity and heating costs compared to a home with an unprogrammed thermostat, depending on local climate and other factors—allowing it to pay for itself in under two years. (When the device appears in Europe, the payback time will be significantly faster because energy is more expensive there.) Most savings flow from the system’s ability to detect when the house is empty and learn its owner’s preferences, but Nest also saves energy by figuring out how to minimize the use of the air conditioning’s chiller and maximize the use of the fan. It also coaches people to use less energy; when consumption falls, they’ll see a green leaf icon on the thermostat and its mobile and Web interfaces. That leaf won’t appear if the energy use fell because of a shift in the weather. And Nest moves the goalposts so people must cut usage further to keep seeing the leaf.

Nest’s ability to change how people consume energy also appeals to utilities, because the device can smooth out spikes in usage. Eventually, the thermostat’s Internet connectivity could allow utilities to introduce smarter versions of “demand response” programs, in which customers get a discount in return for letting their utility adjust their thermostat in times of extremely high usage. Reliant, a utility in AC-dependent Texas, recently started bundling a free Nest thermostat with one of its plans.

Clearly, Nest’s thoughtful engineering could be applied elsewhere in the home, and its founders acknowledge that they plan to build more than just thermostats. “We have one of the best teams in the industry,” says Rogers—meaning Silicon Valley rather than the HVAC business. “They’re here for more than just one product.”

But Nest mimics Apple’s strict secrecy. My visit was limited to the sparse lobby and a meeting room just inside the front door because, as the director of communications put it, the company was on “lockdown” while a new product was developed. When pressed, Fadell dismissed a suggestion that it would be logical to expand into “home automation,” products today mostly pitched at enthusiasts that allow home appliances and lighting to be controlled remotely. “I’m not here to impress geeks,” he says, but to make simple home technology “empowering for everyone.”

The only thing clear about Nest’s future is that the thermostat, seriously as it was taken, was only a warmup act. The iPod Fadell created at Apple was the first of a series of products that reinvented the company, says Peter Nieh, who led the venture fund Lightspeed’s investment in Nest. “[Then] there was iPhone and much more. The thermostat is the iPod. It’s the beginning.”